It’s too late for central bankers to start raising interest rates

The river Main with the European Central Bank in Frankfurt, Germany. The region's outlook is getting murkier, with the Bundesbank saying this week that Germany's expansion has stalled. Photo: AP

If you have not started raising interest rates in earnest already, forget it.

Central banks that have dawdled have missed the cycle. Growth seems to have peaked, and markets are signaling potential trouble. For those outside the US who tightened consistently, this is a prudent time to look around and reassess.

Nations that could reasonably have been expected to raise borrowing costs in the past week took a pass. South Korea and Indonesia fit that category. Comments after the deliberations could be read as meaning hikes are coming, but there was a case for proceeding now - and they didn't. They are hedging – in the case of Indonesia, after having already raised a handful of times. What do they see that's giving them pause?

The optimism that prevailed last year and the start of 2018 has dissipated and, along with it, the idea that the world could set monetary policy in broadly the same direction. Signs of a reset are there, especially outside the US. Interest-rate increases are being punted and in some instances may not appear at all.

What's so special about the Bank of Korea and Bank Indonesia? South Korea is one the world's biggest exporters, a top semiconductor supplier and a major steel producer. In contrast, Indonesia is a developing economy. It's been at the forefront of emerging-market efforts to stem a slide in currencies that's included a handful of rate hikes in quick succession. Indonesia has been a model student for the International Monetary Fund.

The shifting tides aren't a uniquely Asian phenomenon. The idea that the European Central Bank can lift interest rates late next year and in 2020 has become unrealistic. The ECB is wrapping up bond buying, and that's appropriate. Changes to the outlook aren't so dire as to warrant deferring that overdue step.

Ending quantitative easing does not equate to raising rates. Even if the ECB were explicitly targeting an increase for late 2019, it’s hard to put much weight on that, considering that the region's outlook is getting murkier. The Bundesbank said this week that Germany's expansion stalled – though the central bank also expects that to turn around. It underscores the vibe that air is deflating from the world economy.

Central bankers face a choice about whether to proceed with increases after a short delay and risk harming their economies or pause for a more prolonged period. The latter route allows for a better read on whether the world economy has merely plateaued at a decent level or is on the cusp of something less attractive. Inflation is pretty benign and trade battles between the US and China may further upend supply chains.

The risk is that when the downturn comes, whether in one year or five, there's little ammunition.

The outlier is the Federal Reserve. The Fed is pressing ahead with its tightening because the domestic economy is still strong and unemployment is in the basement.

However, most of the Fed's upward nudges for this cycle are probably behind us. Maybe three or four more to get to a level that neither stimulates or reins in activity; beyond that is open to debate.

This seems to be a moment to mark in the world economy, a peak: The IMF predicts 3.7 per cent global growth this year and next. Three months ago, it was 3.9 per cent. If central bankers respond cautiously, that peak doesn't have to be followed by a dramatic fall.